Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Is This Company the Big Winner in Obama's Push for Precision Medicine?

President Obama has released more details about his plans to fund a precision medicine initiative that the administration hopes will mean that doctors can deliver the right medicine to the right patient at the right dose at the right time.

The plan to advance personalized medicine includes $215 million in funding that could accelerate demand for Illumina's (NASDAQ:ILMN) gene sequencing solutions.

First, a bit of backgroundThe idea of using genetics to create new medicines and determine which patients would respond best to them isn't new. Cancer treatment has been at the forefront of this research for years, both in innovating patient screening and revolutionizing drug development.

For example, the University of California San Diego Moores Cancer Center runs the Center for Personalized Cancer Therapy.

That center runs genetic tests on tumors in a bid to match up patients with the most effective cancer treatments, including both FDA-approved medicines such as Bristol-Myers Squibb's Opdivo and drugs that are currently in clinical trials, such as BioMarinPharmaceutical's BMN-673.

At the center's Institute for Genomic Medicine, or IGM, a lot of that genetic research is being conducted with the help of Illumina's gene sequencing machines. According to the IGM, the Illumina HiSeq 2000, Illumina HiSeq 2500, Illumina MiSeq, and Illumina HiScan System are all used at the facility.

At the tipping pointAccording to the MD Anderson Cancer Center's Sheikh Khalifa Bin Zayed Al Nahyan Institute for Personalized Cancer Therapy, we are converging on a "perfect storm" in personalized cancer treatment that could be "offering the opportunity to make a bold leap forward in personalizing cancer care."

One of the driving forces of this opportunity is the significant advances in speed and cost that have been made over the past decade in sequencing genes.

Many of those advances have been the result of innovation at Illumina. In 2001, the National Human Genome Research Institute reports that the average all-in cost to sequence a genome was $100 million. Today, the cost to sequence a genome on Illumina's HiSeq X Ten has fallen to a little less than $1,000, but it's not just lower prices that will allow for significant strides forward in drug development and treatment. Speed will have a big impact, too. For example, the HiSeq X Ten -- a system of 10 machines -- may be able to sequence 18,000 genomes per year, and that means that more patient population data can be collected, analyzed, and leveraged for greater insight.

And that means big bucksIllumina's new HiSeq X Ten carries a price tag of $10 million, yet demand has significantly outpaced Illumina's January 2014 forecast for five customers last year.

In Illumina's fourth-quarter conference call, the company reported that it had 18 customers (up from 13 customers exiting Q3) that had ordered a total of 201 HiSeq X Ten systems (up from 144 orders exiting Q3). Overall, Illumina shipped 134 HiSeq X Ten systems last year.

As a result, Illumina's sales grew 32% year over year to $512 million in the fourth quarter, accelerating from the 29% year-over-year growth to $346 million that Illumina reported in Q3.

But while Illumina's machines are pricey and generate significant top-line revenue, Illumina's real opportunity may not come from building expensive machines, but from generating revenue from the genomic information that these sequencers produce.

Illumina already generates 57% of its revenue selling consumables to the users of its sequencers, and in the fourth quarter, consumables revenue grew 19% from a year ago to $290 million.

Ultimately, however, a significant portion of Illumina's sales could come from software solutions that automate workflow and data analysis, or from deals wherein Illumina embeds itself as a companion diagnostic for new personalized medicines.

For instance, in 2013 Illumina announced that the FDA had cleared its diagnostic kit assays for use in detecting cystic fibrosis that simultaneously detects 139 clinically relevant disease-causing mutations and variants within the cystic fibrosis transmembrane conductance regulator, or CFTR, gene. Illumina is also collaborating with AstraZeneca, Johnson & Johnson, and Sanofi to develop genetic tests that can better identify which patients would most likely respond to their specific cancer drugs.

Source: Illumina

Looking forwardThere could be a multiplier effect to the impact of the president's plans that means that future research activity proves to be far greater than what is indicated in the administration's budget. A study by the Association of American Medical Colleges in 2011 showed that every dollar invested in research at medical school and teaching hospitals generates $2.60 of economic activity, not including the benefit of commercializing drug and research discoveries. Given that so many new emerging biotechnology companies have been created to explore commercialization of research conducted by medical colleges, it wouldn't be surprising to see additional NIH funding fuel even more demand for Illumina over time.

Regardless, as it stands today, the NIH plans to use its $130 million share of the plan's $215 million to recruit a million or more volunteers to share their health data for analysis. Another $70 million will go to the National Cancer Institute for genetic research, and the remainder will be divvied up between other government agencies to create the infrastructure necessary to process information and address new drug applications. Based on that allocation, $200 million will be spent on initiatives that could boost sales for Illumina, and that could mean that Illumina is the biggest winner among companies likely to benefit from this initiative.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Legal beagles won't let me ask them and won't let them tell me. The Motley Fool recommends BioMarin Pharmaceuticals and Illumina. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.
Follow @ebcapital